A $1,000 Donut Hole

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

District A District B

To

tal M

&O

Re

ve

nu

e p

er

WA

DA

Revenue per WADA Teacher Performance Bonuses

EQUITY CENTER

News & Notes

January 2009Vol. 28, No. 1

Advocating School Finance Equity and Adequacy in Texas

A $1,000 Donut HoleThe Flaw in Outside-the-Formula-System Target Funding

(continued on page 2)

Donut

Hole

Whole

Donut

Some may believe that “targeting” public education funding outside the formula system for a particular purpose is the bestway to “get the money where the problem is.” That is simply not the case. In this article, we will make the case thatstate-level target funding is inefficient and actually works against an adequately funded public education system.

The Current SituationOne thing that the current Target Revenue Hold-Harmless controversy has made painfully clear is that districts are fundedat significantly different levels. It is not uncommon at all for one district to be funded $1,000 or more per WADA higherthan its neighbor—at the same tax rate and adjusting for legitimate cost differences among children and districts.

The table on page 2 is based on TEA near-final data for the 2007-08 school year for the3.6 million WADA in the 700 districts with a$1.04 tax rate—the highest M&O tax ratethat can be set by a school board without anelection.

Consider ThisUsing the weighted average funding levels inthe table (pg. 2), let’s assume that District Ais funded at $6,099 per WADA and DistrictB is funded at $5,098.

Since District A is funded at a higher levelthan District B, District A can pay itsteachers significantly more than District B.A $5,000 per teacher difference in base payis well within reason, given the $1,000 perWADA funding difference.

Let’s suppose the state targets $100 perweighted student (WADA) outside of theformula system to be used for teacherperformance bonuses—an effort to rewardthe best teachers and keep them in theclassroom. These funds cannot be used forany other purpose—hence the word“targeted.”

Districts A and B use their $100 per WADAbonus allotment to grant $3,000 bonuses toTeacher A and Teacher B, respectively, bothof whom are widely recognized as excellentteachers.

Tot

al M

&O

Rev

enue

pe r

WA

DA

Page 2January 2009 Equity Center News & Notes

A $1,000 Donut Hole(continued from FRONT)

Contact Bob Aikin at 903-886-1978 or aikin.group@embarqmail.com

* Sorted by Revenue per WADA

Disadvantage perTypical Elem.

School Campus1

5,030

5,082

1,466

1,117

1,0015,0986,099

10% vs. 10% 1,232,000

938,000

841,000

6,496

6,200

Percentage of WADAHighest vs. Lowest*

Weighted Avg.Funding Level for

Highest Group

Weighted Avg.Funding Level for

Lowest Group

FundingDisadvantage

per WADA

20% vs. 20%

25% vs. 25%

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• 30 years experience in running winning bond elections.• First hand expertise in early voting strategy. Former State Rep. Aikin wrote Texas’ early voting laws.• Maximizing the state share of debt service so as to minimize local tax burden.• Structuring debt service to best serve your cash flow needs.

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• Refinance IFA supported leases (since 2000). A bond election, and its higher bond rating, can pay off a lease and continue to receive IFA support.• Refinance QZABs and refinanced debt. (since 2003). For the same purposes as refinancing IFA leases. Additionally we have qualified the refinanced debt for state EDA subsidy.

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But, what is a $3,000 bonus supposed to achieve when thebase pay is $5,000 lower than what is paid in the nextdistrict? Even with this bonus, Teacher B is still paid lessthan every teacher in District A—$2,000 less than thosedeemed not worthy of a performance bonus at all.

Making the PointTexas ISD’s Joe Smith once said, “You don’t put a new setof tires on your car while the motor still has partsmissing.” But that is what happened here.

District B didn’t need a $100 outside-the-system program.What it needed most was an inside-the-formula-system$1,000 level-up—something that didn’t happen because

the use of the money was dictated to them, and half themoney was used to add on to the district that already hadan advantage of 10 times the $100 amount.

The District A and B scenario is likely to play out withTeacher B applying for the first teaching job that comesopen in District A, where he or she will be guaranteed$2,000 more than she made in District B—and if shecontinues to be awarded the bonus in District A, she willearn $5,000 more.

The incentive bonus may keep Teacher B in the classroom,but that classroom won’t be in District B.

Page 3January 2009 Equity Center News & Notes

Dr. Charles Luke has over 26 years combined experience in public education and non-profit organizations. Charles works as an independent consultant for several companiesin the field of education and school law. In addition to his work as a consultant,Charles is an Adjunct Faculty Member at Tarleton State University in Stephenville,Texas where he teachers Internship, Public Education Law, and serves as acertified assessor of school administrators.

Charles has worked in the field of public education as a teacher, principal, andsuperintendent throughout Texas. Charles serves as the Vice Chairman for theVolunteers of America charitable organization in Dallas, Texas. He holds a doctoratefrom the University of North Texas in Educational Administration.

Dr. Charles Luke

Consultant & Adjunct Faculty Member

Horizontal and Vertical Equity in Texas

Public School Facilities Funding

With the current crisis in school funding created by severely reduced levelsof state funding through the “Target Revenue Hold-harmless” provisions,educators throughout the state of Texas continue to face difficulties in

stretching the educational dollar. During such times school funding equity and adequacy issues make itparamount that each dollar be used to maximum efficacy. In addition, the current inequities in facilitiesfunding simply add to the magnitude of the crisis.

A 2000 GAO report ranked Texas as the fifth neediest of all 50 states, with an unmet facilities need of$9,467,620,774. Meeting state-wide facilities needs would require an increase in funding levels ofapproximately $248 per pupil for a ten year period. Recent research into this issue spotlights the dire lackof equity provided at current facilities funding levels.

Description of Research StudyThe study (Luke, 2007) was undertaken in an effort to determine whether or not the Texas public schoolfacilities funding system is statistically inequitable as measured by school district spending. Severalstatistical tests were administered using per pupil capital outlay data for fiscal years 2000-2001; 2001-2002;and 2002-2003. Among other equity issues, the study reviewed horizontal and vertical equity, bothstandards established by Berne and Stiefel (1984).

Funding Streams and State MechanismsIn Texas a portion of funds used for maintenance and operations is equalized through state formulae.Facilities however are funded through monies received from tax levies for “interest and sinking.” Thesemonies comprise the bulk of funds school districts throughout the state use to fund capital outlays and aregenerally accessed through local bond issues.

In efforts to address equity issues the state created a variety of facilities funding mechanisms in the late1990’s. Although the Instructional Facilities Allotment (IFA), New Instructional Facilities Allotment(NIFA) and Existing Debt Allotment (EDA) were designed to “level the playing field” for facilitiesfunding, they have not maintained adequate funding levels. Consequently, the study found them to bestatistically insignificant in improving facilities funding equity throughout the state.

Overall SpendingOverall capital outlay expenditures fluctuated widely during the three-year period of the study. Duringthe first year, spending in districts above the median increased while spending in districts below the

(continued on page 5)

Page 4January 2009

Equity Center News & Notes

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Horizontal and Vertical Equity in Funding

median decreased. Districts in the top-half of the distribution also consistently out-spent districts in thebottom-half over the three-year period of the study. In fact, fifteen percent of the districts in the upper-half of the distribution accounted for over 40% of all facilities spending in the state.

Horizontal EquityThe bottom half of the distribution of school districts per pupil capital outlay expenditures was measuredutilizing the McLoone index to determine the amount of effort it would take to bring the bottom half ofthe distribution up to the median. Very little equity was found in the bottom-half of the distribution ofschool districts. With a coefficient of 1.0 equaling perfect equity and lesser values of equity decreasing tozero, coefficient scores were .403 (00-01); .440 (01-02); and .381 (02-03). These results indicated that itwould require approximately 60% more spending to bring the bottom half to the median level of perpupil capital outlay spending.

In addition, per pupil capital outlay expenditures in the top half of the distribution were measuredutilizing the Verstegen index. Since the test measures perfect equity to be at 1.0 with imperfect equityindicated by values above this, the results of the Verstegen test indicated poor equity all three years.Although more money was spent among the top capital outlay spenders, it appeared to be concentratedwithin the upper-half of the distribution and is not equitably distributed.

Additionally, a coefficient of variation test was administered to the data to determine changes in thestandard deviation from the mean over the three-year period of the study. By measuring the “generalfunds” and “all funds” categories for each school district, a clearer picture of equity levels was obtained.These results indicated less equity in the facilities funding system as a result of the obvious ability ofwealthier districts to spend at higher per capita levels.

Finally, in order to measure horizontal equity among the upper and lower extremes of the distribution ofschool districts, a federal range ratio test was administered. The results of this test indicated that overallequity was poor between the top five percent and bottom five percent of districts in the study. Table 1below and Table 2 (page 7) indicate extreme differences in the top and bottom spenders in the study.

(continued from page 3)

(continued on page 7)

* Federal range ratio expressions moving further from 1.0 represent a negative change in equity.

Avg. Change2000-2001 2001-2002 2002-2003

$3,089.66

$52.23

$2,989.25

$52.21

95th Percentile

56.2658.1530.24

5th Percentile

Federal Range Ratio

-4%

-47%

-45%*

$3,095.55

$99.09

Table 1Federal Range Ratio – Comparison of Per Pupil Capital Outlay Expenditures at the

95th and 5th Percentiles – All Funds Category

Page 6January 2009 Equity Center News & Notes

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Page 7January 2009 Equity Center News & Notes

Vertical EquityThe Odden-Picus Adequacy index (OPAI) was used to determine vertical equity if capital outlayexpenditures are equalized at the 85% level set by the court in Edgewood v. Meno (1995). Per weightedpupil capital outlay expenditures were measured by setting a false mean at the 85th percentile of thedistribution of 1,039 school districts and administering a McLoone index test at this level. The OPAIyielded coefficients of .431 for 2000-2001; .335 for 2001-2002; and .318 for 2002-2003. Under the Edgewoodstandard, equity decreased in all three years of the study as expenditures decreased below the 85th

percentile. This indicated that while vertical equity is low at this level, increased state funding for capitaloutlay affects equity positively.

Finally, a disproportionate share of per pupil capital outlay spending occurred above the 85th percentilewith the top 15% of districts spending from 42% to 50% of total expenditures for capital outlay in 2000-2001; 2001-2002; and 2002-2003. This finding illustrates the vast expanse of capital outlay spendingdisparities existent among the state’s school districts, with a few school districts spending nearly half ofthe total capital outlay expenditures of the state.

ConclusionIt is undeniably evident that there is poor horizontal and vertical equity in the funding of public schoolfacilities in Texas. Both horizontal and vertical equity would be greatly improved by providing fundingbased on a per pupil basis for all districts. In the three-year period of the study, whenever equalizeddollars were used for capital outlay expenditures, equity improved both horizontally and vertically. Inorder to provide greater levels of horizontal and vertical equity in the system, facilities fundingmechanisms must be equalized in the same manner as maintenance and operations funding mechanisms.

ReferencesBerne, R. & Stiefel, L. (1984). The measurement of equity in school finance: Conceptual, methodological, and empirical dimensions. Johns Hopkins University Press: Baltimore, M.D.

Edgewood ISD v. Meno. 917 S.W.2d 717 (Tex. 1995).

Luke, C. (2007) Equity in Texas public education facilities funding. Dissertation for Ed.D. in Education Administration. University of North Texas, Denton, Texas. Published digitally online at http://digital.library.unt.edu/permalink/meta-dc-3647

United States General Accounting Office (March, 2000). School facilities: Construction expenditures have grown significantly in recent years.GAO report number HEHS 00-41. Washington, D.C.

Horizontal and Vertical Equity in Funding(continued from page 5)

* Federal range ratio expressions moving further from 1.0 represent a negative change in equity.

Table 2Federal Range Ratio – Comparison of Per Pupil Capital Outlay Expenditures at the

95th and 5th Percentiles – General Funds Category

Avg. Change2000-2001 2001-2002 2002-2003

$325.61

$6.98

$325.83

$7.06

95th Percentile

45.1845.6518.52

5th Percentile

Federal Range Ratio

-17.5%

-64%

-40%*

$394.67

$20.22

Page 8January 2009 Equity Center News & Notes

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IMPORTANT LEGISLATIVE DATES AND INFORMATIONSession BeginsTuesday, January 13, 2009 (1st day)81st Legislature convenes at noon[Government Code, Sec. 301.001]

Session EndsMonday, June 1, 2009 (140th day)Last day of 81st Regular Session; corrections only in House and Senate[Sec. 24(b), Art. III, Texas Constitution]

Sunday, June 21, 2009 (20th day following final adjournment)Last day governor can sign or veto bills passed during the regular legislative session[Sec. 14, Art. IV, Texas Constitution]

Monday, August 31, 2009 (91st day following final adjournment)Date that bills without specific effective dates (that could not be effective immediately) become law[Sec. 39, Art. III, Texas Constitution]

Texas Legislature Online: www.capitol.state.tx.us

Texas Senate: www.senate.state.tx.us

Texas House of Representatives: www.house.state.tx.us

Legislative Budget Board: www.lbb.state.tx.us

Texas Comptroller: www.window.state.tx.us

Statute of the Texas Education Code: tlo2.tlc.state.tx.us/statutes/ed.toc.htm

Page 9January 2009 Equity Center News & Notes

In 2002, state aid paid about 30% of the total cost for facilities. By last year, the state’s share dropped toless than 19%. Tax rates rose as construction and land costs increased while the state guaranteed yieldstayed flat.

Over this same period, property values rose 44% and the number of students increased by 10%, yet totalstate aid in 2007 was 2.1% below the total aid in 2002 and 4.3% below the 2003 total. State aid per ADAdropped from $189 to $169. Even if state aid per student had grown by only 3% per year, well below theinflation rate for construction and the increase in local values, the 2007 appropriation for IFA and EDAwould have totaled nearly $950 million.

Increased property values and completed bond programs over the last six years have reduced stateformula costs by enough to fund a permanent, automatic “roll-forward” of both the EDA and new IFAawards. In fact, almost every eligible district that applied for IFA in 2008 received funding (some projectsin eligible districts were not funded due to technicalities.) While the Summary of Finance website hasn’t

The compression of debt service tax rates through the restructuring of theInstructional Facilities Allotment (IFA) and the creation of the Existing DebtAllotment (EDA) was the key source of property tax reductions in the tax reliefplans of 1999. However, through neglect of the formulas and failure to

appropriate sufficient money to fund the IFA program, much of that relief has disappeared. The followingtable tells why.

The Forgotten Tax Relief:School Facilities Funding in Texas

Mr. Colbert is a public affairs and policy consultant in business, strategic planning andproblem-solving to numerous clients. He was first elected to the Texas House ofRepresentatives in November 1980 and represented District 132 in Houston until 1992.Representative Colbert served as Chairman for Budget and Oversight of the Public EducationCommittee and as a member of the Appropriations Committee for eight years. Since leavingoffice, he has continued to have a major impact on legislation in Texas, particularly ineducation and school finance and was a lead witness for two of the three plaintiff school districtgroups in their school finance lawsuit against the state of Texas.

Paul Colbert

(continued on page 11)

760,068,506

2,490,611,461

School Year I&S Collections

29.8%1,747,382,231

IFA/EDA and Local Funding for School Facilities

2002-03

2003-04

2004-05

2006-07

2005-06

2007-08

TOTAL

24.8%

28.5%

22.4%

24.2%

18.8%

24.2%

2,669,316,880

2,882,398,272

3,185,104,400

3,501,247,914

3,867,590,976

18,596,269,903

715,001,197

769,557,861

784,559,772

727,726,948

4,500,143,514

743,229,230

1,909,248,374

2,167,397,075

2,416,556,777

2,716,688,142

3,139,864,028

14,096,126,389

State/LocalFacilities Payments

State FacilitiesAssistance

State Percent ofTotal Facilities

Payments

*Data Source - Texas Education Agency Summary of Finance State Level Summaries

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Page 10January 2009 Equity Center News & Notes

Page 11January 2009 Equity Center News & Notes

yet been updated to reflect those awards, it appears from the preliminary numbers that 2008-09 state aidfor facilities will again total about $730 million – well below most previous funding levels. Clearly, thesystem can be fixed with minor increases in funding.

The Solution: Create a Single Facilities ProgramCombining the Best of the EDA and IFA

First and foremost, it must be remembered that every dollar of state aid for facilities must be used tocompress property tax rates. Therefore, any new expenditure for this program is actually tax relief inthe same manner as the compression required under HB1 in 2006. The following provisions will makethat tax relief stable and permanent:

1. Fund facilities assistance beginning in the same year that the first debt service payment is made,but rather than have the IFA “until the money runs out” approach, draw on any surplusFoundation School Program funds if the appropriated funds aren’t sufficient. If there isn’t enoughsurplus, proportionately reduce the aid and make it up in “settle-up”, just as is done for M&Ofunding.

2. Change the EDA to a Permanent Tax Rate Compression program with eligibility for new bondissues automatic in the subsequent biennium. This would eliminate the “Russian Roulette” risk totaxpayers and would not increase state costs.

3. Set the guaranteed yield level at a percentile of wealthcloser to the buying power established when the EDAstarted in 1999-2000. This would roll back the shift ontolocal property taxes and return the tax rates for facilitiesback to the rates needed at that time. Because the value ofa percentile will grow as property values increase, localproperty tax rates will be automatically compressed eachyear, reducing or eliminating the impact of “appraisalcreep.”

4. Create a revolving fund, recycling state funds saved byincreased property values and completed bond programs,to meet the cost of new construction and the higherguarantees necessary to offset rising construction and landcosts. The fund should also increase with ADA growth and inflation to fund the additional taxrelief provided each year.

5. The state/local shares should be determined solely by the debt payment schedule, which is knownwhen the bonds are sold. The local share of annual debt service can be provided by property taxrevenue, penalty and interest on delinquent taxes, I&S fund interest, and any other available localresources that have not already been used for the local share elsewhere. This would further reducelocal property tax rates by using “trapped” funds.

6. The minimum ADA set by formula should be 400, assuring sufficient funding for small districts.

7. The limitation on the guaranteed amount should be increased, reflecting increases in constructioncosts.

(continued from page 9)

Forgotten Tax Relief: School Facilities Funding

Taxpayers Play RussianRoulette with EDA FundingTaxpayers are asked to approve a bondissue before the state commits to EDAassistance. The cover story in theNovember 2006 issue of News & Notesnarrates a school board meeting and dealswith this issue and the questions that ariseout of the conversations. This scenariooccurs all over the state. Link to ourwebsite to download a copy of the article:www.equitycenter.org/russianroulette.pdf

Page 12January 2009 Equity Center News & Notes

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